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Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
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Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
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Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
Behind The Data: A Quantitative Analysis of Mexico and Brazil
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Behind The Data: A Quantitative Analysis of Mexico and Brazil
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Behind The Data: A Quantitative Analysis of Mexico and Brazil

  1. Behind The Data: A Quantitative Analysis of Mexico and Brazil Prepared by: Jared Bilberry Joseph Depew Amanda Gura
  2. Introduction Economic growth is considered to be one of the most important objectives within a country to determine an increase in the size of its economy over a period of time. This growth is often used as an instrument for not only improving the quality of life and reducing poverty, but also improving health, driving human development and creating jobs. These factors can allow economies to generate prosperity and create opportunities over generations, which in turn creates wealth and increases the overall GDP per capita of a nation. Mexico and Brazil are two of the biggest and most economically powerful countries in Latin America, and therefore have enjoyed high levels of economic growth. However, while both countries share similar economic success, there are fundamental differences in how both countries came to such prosperity. Factors such as agriculture and manufacturing are well known among these two countries, however a cross country analysis shows that they both leverage additional strengths, based on both prospective country’s politics, geography, innovation and natural resources. We will be examining these two countries with the goal of explaining the growth performance from 1990 to present. With assisted quantitative methods, we will emphasize objective measurements of factor accumulation, productivity and fundamentals to analyze the long run perspectives of Brazil and Mexico. Growth Accounting As we know, productivity is the key indicator of economic growth. This effectiveness in which the factors of production are converted into output is critical in how Mexico and Brazil are able to produce - and consume - increasingly more goods and services for the same amount of work (Weil, 2012). Growth accounting is the technique we use to measure the growth rate of productivity in an economy (Weil, 2012). In Mexico (as well as other productive economies) it is well known that economic growth stems from an increase in the use of inputs, in addition to increases in total factor productivity. This is often traditionally represented in an equation in per worker terms where growth rates of output, physical capital, and human capital allows us to measure its growth rate of productivity. Specifically, in the case of Mexico; the analysis comes from constructing a set of growth accounts where we deconstruct the growth in output per worker displaying the contributions from the accumulation of physical and human capital. Ultimately, this would allow us to analyze a change in the total factor of productivity (TFP). The analysis uses a framework based on the assumption of the relationship between output, capital, labor, and technology. This model would be represented in the featured aggregate Cobb-Douglas function below:
  3. , 𝑌฀ = 𝐴฀ 𝐾฀ ∝ 𝐿฀ 1−∝ Where (Yt) is output, (At) represents the TFP, (K) is capital and (L) is labor. If the working-age population grows at a constant rate, and TFP grows at a constant rate, 𝑁฀ = 𝑁ₒη ฀ , then the economy has a balanced path of growth for all quantities, in which the per 𝐴฀ = 𝐴₀γ (1−∝)𝑡 working-age person would grow at the rate y-1, except for hours worked per-working age person - which is constant (Ruhl, Kehoe, 2010). With labor stock, we would need to examine how many people are within the labor force in general. In addition to this, we can measure labor by looking into other elements within a country such as health and education, understanding that not all human capital is equal. For capital stock, we would analyze the value of capital stock within the economy. This could include tools and other types of equipment that allow for increased work productivity. Finally, we measure technology stock through the analysis of the prior two components, essentially using it as an adjustment to connect the equation together. That is, once we figure out labor, capital and output (GDP per capita); we can use technology to assess how technologically advanced a country is. With this information, we are able to connect the factors of production within an economy to the actual aggregate output of said economy. These contribution estimates of growth in the factor inputs and TFP can be constructed without specific knowledge of the functional form of the above production process. That being said, a country’s economic growth comes from the increase in the use of inputs, as well as from increases in total factor productivity. Development Accounting As we now know, because of production function, countries can differ in their levels of output due to differences in productivity, factor accumulation, or both (Weil, 2012). In addition to this, we can use the factors of production in equation form, to create a single aggregate shown below: factors of production = 𝑘 ∝ ℎ 1−∝ Where the production function would be represented as: output = productivity x factors of production
  4. At this point if we wanted to compare the productivity in two countries, we would construct the production function separately for each country. If we were to use Mexico and Brazil and replace it with Country 1 and Country 2 the the production functions would be represented as: and 𝑦₁ = 𝐴₁𝑘₁ ∝ ℎ₁ 1−∝ 𝑦₂ = 𝐴₂𝑘₂ ∝ ℎ₂ 1−∝ From there we divide the first equation by the second, stating our comparison as a ratio: 𝑦₁ 𝑦₂ = 𝐴₁ 𝐴₂ ( ) 𝑘₁ℎ₁ 1−∝ 𝑘₂ℎ₂ 1−∝ ( ) This technique for breaking down differences in income into the part that is accounted for by differences in productivity and the part accounted for by differences in factor accumulation is called development accounting (Weil, 2012). This manipulation of a production function is a way to examine whether cross-country income differences arise from differences in total factor productivity (TFP), or factor accumulation. Development Growth Accounting (2005) __________________________________________________________________________________________________________________ Output Phys Human Factors Productivity Country Y/P K/P h/P k1/2 h/2/3 A __________________________________________________________________________________________________________________ USA 1.00 1.00 1.00 1.00 1.00 UK 0.76 0.69 0.97 0.87 0.87 Canada 0.75 0.86 1.01 0.96 0.79 Mexico 0.29 0.27 0.79 0.56 0.52 India 0.13 0.10 0.74 0.38 0.35 __________________________________________________________________________________________________________________ Source: Weil (2009) Economic Growth, 2nd Ed. p. 193 This table tells us a few things. First, we can analyze the large differences in productivity, (A), between rich countries such as the USA, Canada and UK compared to Mexico. Second, we can also examine the
  5. details of what each county's strengths and weaknesses are. Specifically, with Mexico we can see that the level of human capital is comparative to the USA. However, the country only has 52% of the production of the USA. Development Growth Accounting (2009) __________________________________________________________________________________________________________________ Output Phys Human Factors Productivity Country Y/P K/P h/P k1/2 h/2/3 A __________________________________________________________________________________________________________________ USA 1.00 1.00 1.00 1.00 1.00 UK 0.82 0.68 0.87 0.80 1.03 Canada 0.80 0.81 0.96 0.91 0.88 Mexico 0.35 0.33 0.84 0.61 0.56 Brazil 0.20 0.19 0.78 0.48 0.42 __________________________________________________________________________________________________________________ Source: Weil (2012) Economic Growth, 3rd Ed. p.186 This second table is even more interesting from a development accounting perspective, as we can now see that Brazil has become comparative, if not competitive with Mexico. Also, it is important to realize that in the first chart in 2005, Brazil was not represented amongst countries with the highest levels of productivity, which is why it is not included on the list. Factors of Production Historically, Mexico has relied heavily on its agricultural and farming roots. However, just like many other countries around the world - Mexico is now much richer than it was 100, 75 and even 50 years ago. This means the amount of workers in these industries has dropped, with higher education levels and more access to new technology. In addition to this, the 1982-85 economic crisis forced the country to modernize in order to compete economically with China, Canada and eventually Brazil. In 1994 the Mexican government decided to implement the North American Free Trade Agreement (NAFTA), which included reforms on fiscal reforms, privatization of government operated firms, and opening up the economy to trade and foreign investment (Ruhl, Kehoe, 2010). Within the last 20 to 30 years, Mexico has
  6. also invested into technology as this allows for more efficient production of more and better goods and services, ultimately creating and sustaining economic growth. However, with the addition of all of these aforementioned policies and economic strides, Mexico’s growth since the 90’s has been disappointing despite having the second largest GDP in Latin America. Despite their differences in language, culture and region, these two Latin American countries create and produce some of the same goods and services. These include lucrative industries such as mining, manufacturing, and agriculture, in addition to both countries having an increasingly growing service industry. Specifically over the last 10 years, Brazil’s service industry ranged from being roughly 57.57 to 63.34% of the total GDP (O’Neil, 2022). Other areas such as agriculture and industry range from 4.17 to 6.89%, and 17.17 to 23.1%, respectively. When we compare these distribution of goods in Mexico, we see similar results with Mexico’s service industry accounting for roughly 58.44 to 61.11% (O’Neil, 2022). For agriculture and industry, we see ranges from 3.09 to 3.83% and 29.62 to 33.78%. However as noted in the development accounting tables, Brazil appears to be doing increasingly more with less with the same goods in services. Now that we understand the what, we can now focus on the why. While it is well known that Mexico is an international trade and manufacturing hub, many don’t realize just how big of a role this industry plays within the country’s economy. With trade agreements stretching over 50 countries and a decrease in shipping costs within North America, Mexico has cemented itself as a global leader in the manufacturing industry. However our research shows that increasing challenges within Mexico’s most productive sectors has hindered it from reaching a higher level of efficiency. With the manufacturing industry being so big, it creates a need for work that often resorts to a differentiated productive system. That is, in Mexico there are many informal enterprises, which have a limited capacity for innovation and adoption of advanced technology and limited ability to integrate into global value chains (Iacovone, Moreno, Olaberria, López, 2021). This will obviously have a negative effect on TFP, along with research and development efforts (R&D) as well. Informal enterprises also tend to be ineffective in their management skills and practices, and lack access to financial services (Iacovone, Moreno, Olaberria, López, 2021). This informal way of working, while sufficient, lacks the efficiency to allow firms to attain their goals at lower cost. Agriculture has less of an influence than the manufacturing efforts within Mexico, but is still very important for many rural and isolated communities. Crops such as corn, coffee, beans, tomatoes and avocados all help drive Mexico’s culinary and regional influence. In fact, in 2021, Mexico’s agricultural
  7. exports (to all countries) totaled about $44.8 billion. While the country has made great strides in this sector, it also suffers from challenges - which may not be man made. Drought has become one of the biggest challenges facing Mexican agriculture in 2022. Increasingly, the country’s farmers find themselves in a position year on year with low rainfall and the consistent threat of lost or damaged crops. Every year, these crops are damaged by low water levels and drought issues throughout the country. As these issues face the agricultural community, there stems an even greater issue. Many people within Mexico depend on these crops to feed their families and cities. In a way, Mexico is faced with two issues at the same time - a decreasing level of efficiency with crops due to water issues, and a less healthy society due to the lack of natural resources. As we’ve examined in economic growth, this affects both human and physical capital. With human capital, health can be lowered due to the access to fresh fruits and vegetables. With physical capital, the ability for Mexico to produce goods at a sufficient level can be hampered by the lack of water as well, with inventory and equipment being utilized less due the lack of nourishment to cultivate crops. These factors all play a role in how Mexico, while having a massive economy, simply cannot produce at the level it can (and should) be able to reach. Now let’s look at Brazil. This South American country began the 90’s arguably worse than Mexico. Within the first two years of the decade, president Fernando Affonso Collor de Mello was impeached on charges of corruption, hyperinflation had stagnated the country, and its public sector was all but bankrupt. The future looked bleak for Brazil, and its economic future uncertain. However with what Brazil lacked in leadership and politics, it made up for with its rich, natural resources. After a low level of TFP in the late 90’s, Brazil began to focus on agriculture. Since the mid 2000’s, Brazil has accelerated its transformation from an exporter of mainly tropical agricultural products such as coffee, sugar, citrus, and cacao to a major global supplier of commodities, including soybeans, grains, cotton, ethanol, and meat (Valdes, 2022). Soybeans in particular, have become a crucial crop coming out of Brazil’s farmland. And unlike Mexico, Brazil was able to transform itself into a top 5 producer of 34 commodities and is the largest net exporter in the world (Valdes, 2002). This however, does not come without its own challenges as well. While Mexico struggles with water issues, Brazil faces issues with increases in fuel and fertilizer costs. This will obviously affect TFP (as they affect each other) and how the country’s farms are able to produce at a consistent level. Finally, the biggest concern within the environmental sectors of the world is the deforestation of Amazon jungles or the sake of building and producing plantations. While the demand for Brazilian goods may force additional deforestation, many within the country have become vocal about the preservation of such areas.
  8. Manufacturing has been different for Brazil as well. The government privatized dozens of financial institutions, manufacturers, and mining companies in the 1990’s, including several major steel producers. In addition to this, the country partially opened up the petroleum industry to competition. Previously, Brazil had been home to a plethora of state owned enterprises (SOE’s), which had sluggish results for the South American country. However, privatization has proven successful for Brazil, as local governments can reduce operational burdens, increase market efficiency, and create a more robust private sector. Finally, Brazil has become Latin America’s largest oil producer and has become an increasingly important global player in the digital economy. This is largely in part of how Brazil chooses its trading partners. Currently, China is the primary consumer of Brazilian crude oil, which puts Brazil on pace to be a top-5 global producer. When we analyze these factors, and consider that Brazil is also not as heavily dependent on the U.S., has a significantly bigger population, and is a bigger producer of top resources, we can see how it managed to become one of the world’s largest economies. Factor Accumulation
  9. (Table 6) shows the estimations of factor accumulation for Mexico and Brazil in each of the 14 industrial sectors. With data from the Word Input-Output Database (WIOD), economists Armênio de Souza Rangel and Fernando Garcia de Freitas analyze the trends of productivity and accumulation from 1995 to 2009. As can be seen, capital accumulation and productivity differ between these two countries. In nearly all of the industrial sectors, capital accumulation is greater in Brazil than Mexico. When it comes to skilled labor, employment growth is higher in Brazil. This is offset by a larger reduction in unskilled employment for Brazil than in Mexico, which can indicate a higher rate of substitution of labor by capital and human capital in Brazil. For TFP, Mexico generally shows more positive values than Brazil. The technical efficiency is also worse in Brazil compared to Mexico in 10 out of 14 sectors. This could be caused by the high trade integration between Mexico and the United States which increases the scale of business for Mexico’s economy. We see a similar pattern in the use of skilled labor, as employment growth is higher in Brazil. According to the data, the average value of real wages in Brazil grew by 3.1% per year between 1995 and 2009, compared to a reduction of 0.9% per year in Mexico (de Souza Rangel, Fernando Garcia de Freitas, 2015). While Brazil lags behind Mexico in 11 out of the 14 industrial sectors during this period (due to Mexico’s closer proximity and influence within the United States), allocative efficiency recorded increases in nearly all manufacturing industries (de Souza Rangel, Fernando Garcia de Freitas, 2015). That is, for this time period, all goods and services are optimally distributed among buyers within the Brazilian economy. While Brazil has its weaknesses economically, we can clearly see that the analysis of the decomposition displays that Brazil's growth over the past two decades was primarily driven by factor accumulation. This economic growth since the 90’s has been driven mostly by labor accumulation, with a heavy concentration in the employed labor force and its quality. Brazil spends 6.2% of its total GDP on education, with Mexico spending 4.9%. In addition to this, informal work in Mexico is much higher than in Brazil - with nearly 55 percent of Mexican workers coming from the informal sector. When we compare this to roughly 40 percent of Brazilian workers in the informal sector, we can see how this provides an opportunity for an increase in human capital. Where Mexico shines is in its TFP. During this time period. Brazil managed to have major increases and decreases in TFP, while Mexico’s growth appeared to be more steady. This could be due to the influence of its foreign investors, and the lack of dependence on the U.S. as well. All of the discussed factors display how Mexico and Brazil’s economies build in a way that not only provides short term gain, but also create a long-run perspective of economic growth to be analyzed and linked to future trends.
  10. Cross Country Analysis Figure 1: Growth Accounting Comparison for TFP Growth accounting is used to decompose output growth into changes in inputs of labor and capital, as well as the efficiency in which these factors are combined. (Figure 1) shows a comparison of TFP for Mexico and Brazil over a 20 year period (1999-2019). Both Mexico and Brazil show a relatively stable decline in TFP over time, however, Brazil shows higher values of TFP compared to Mexico. The highest period of TFP growth for Brazil was from 2004 to 2008 with a growth rate of 5.24%. Compared to Mexico, the highest period of growth was from 2002-2006 with a TFP growth rate of only 3.31%. This has a direct correlation with what we see in the development growth accounting table for 2009. Brazil’s growth rate from 2004 to 2008 had essentially allowed it to “close the gap” by that year and put its productivity into the same category as Mexico. However, Brazil suffered a 3.7% decline in TFP from 2009 to 2014 while Mexico experienced a 1.06% increase. Total factor productivity growth shows both how much an economy is improving technology and the efficiency with which factors of production are used (Fuess, 1997).
  11. Figure 2: Country Comparison of Human Capital Per Person (Figure 2) shows a comparison of human capital accumulation for Mexico and Brazil. As you can see, at the beginning of the time period (1999) Mexico’s human capital is above Brazil at 2.5 relative to 2. As the time period progresses, Mexico and Brazil start to converge around 2011 where Brazil now is leading Mexico in human capital accumulation. Human capital is important to consider when comparing these two countries since it refers to the relative health, skill and education of the nation's labor force. If we look at GDP comparison of both countries (Figure 3) we can see that Brazil has a GDP growth rate of 2.32%. While Mexico’s GDP growth rate is 2.05%. From 1999 to 2021 Mexico had relatively low GDP compared to Brazil but still invested more into human capital than Brazil. Figure 3: Real GDP comparison of Mexico and Brazil
  12. Conclusion After a thorough analysis of both countries, we can conclude that both countries have great opportunities for continued and sustainable economic growth. Both countries have a good infrastructure, and seem to have business friendly environments that can be tapped into. While Mexico bases its economy off of its proximity to the U.S. with global manufacturing, Brazil has diversified its investments with other resource rich countries such as China and India. However we must take into account the previous trends and patterns to truly understand where both countries may likely go next. While Mexico is a closer, more connected country to the United States, its dependence on the region means that it faces the same economic woes as the U.S. Therefore, economic downturns affect the country directly. A suggestion could be for Mexico to expand its trade into additional areas of North America, specifically Canada - another developed country. Brazil has done the opposite of this, and therefore has reduced American influence on the overall economy. However, the lack of a key developed trade partner also affects Brazil’s TFP and overall productivity. We see this in how Brazil's economy tends to go up and down in cycles, rather than remain steady over time. However it does benefit from higher skilled labor, and an overall optimistic economic outlook. With political and economic stability, high-skilled labor, and a good legal framework, both countries can easily adapt and become high producing countries from a development perspective. Only time will tell, but with Brazil and Mexico boasting impressive economic performances, political influence, and respectable foreign investments - the future looks bright.
  13. References Fuess, S. M., Jr (1997). Transactions Activities and Productivity Growth in Mexico. The Journal of Developing Areas. https://doi.org/http://www.jstor.org/stable/4192689 Kehoe, T. J., & Ruhl, K. J. (2010). Why Have Economic Reforms in Mexico Not Generated Growth? National Bureau of Economic Research. https://www.nber.org/system/files/working_papers/w16580/w16580.pdf O'Neil, A. (2022). Brazil: Share of economic sectors in the gross domestic product (GDP) from 2011 to 2021. statista. https://www.statista.com/statistics/254407/share-of-economic-sectors-in-the-gdp-in-brazil/ Iacovone, L., Moreno, R. M., Olaberria, E., & López, M. D. L. P. P. (2021). Productivity Growth in Mexico: Understanding Main Dynamics and Key Drivers. The World Bank Group, 2021. https://documents1.worldbank.org/curated/en/099100103252224294/pdf/P170829089422503808 67901fba9060dcbc.pdf O'Neil, A. (2022). Mexico: Distribution of the gross domestic product (GDP) across economic sectors from 2011 to 2021. statista. https://www.statista.com/statistics/275420/distribution-of-gross-domestic-product-gdp-across-eco nomic-sectors-in-mexico/#:~:text=This%20statistic%20shows%20the%20distribution,percent%2 0from%20the%20service%20sector. Valdes, C. (2022). Brazil’s Momentum as a Global Agricultural Supplier Faces Headwinds. Economic Research Service - U.S. Department of Agriculture. https://www.ers.usda.gov/amber-waves/2022/september/brazil-s-momentum-as-a-global-agricultu ral-supplier-faces-headwinds/#:~:text=Measured%20in%20U.S.%20dollars%2C%20the,and%20l ivestock%20production%20increasing%20threefold. Weil, D. N. (2012). Economic Growth (3rd ed.). Routledge Weil, D. N. (2009). Economic Growth (2nd ed.). Prentice Hall. Feenstra RC, Inklaar R, Timmer MP (2015). “The Next Generation of the Penn World Table.” American Economic Review, 105(10), 3150–3182. http://www.ggdc.net/pwt/. De Souza Rangel , A., & Garcia de Freitas, F. (2015). A comparative analysis of productivity in Brazilian and Mexican manufacturing industries. Cepal Review.
  14. https://repositorio.cepal.org/bitstream/handle/11362/38839/RVI115SouzaRangel_en.pdf?sequence =1&isAllowed=y “Brazil GDP per Capita 1960-2022.” MacroTrends, https://www.macrotrends.net/countries/BRA/brazil/gdp-per-capita “Mexico GDP per Capita 1960-2022.” MacroTrends, https://www.macrotrends.net/countries/MEX/mexico/gdp-per-capita
  15. Appendix Timeline of events in Brazil and Mexico: 1929 - Present
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